The Daily Magic Formula Stock for 07/20/2008 is Pre-Paid Legal Services Inc. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is >100 %.
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We were one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. Our predecessor commenced business in 1972 and began offering legal expense reimbursement services as a "motor service club" under Oklahoma law. In 1976, we were formed and acquired our predecessor in a stock exchange. We began offering Memberships independent of the motor service club product by adding a legal consultation and advice service, and in 1979 we implemented a legal expense benefit that provided for partial payment of legal fees in connection with the defense of certain civil and criminal actions. Our legal expense plans (referred to as "Memberships") currently provide for a variety of legal services in a manner similar to medical plans. In most states and provinces, standard plan benefits include preventive legal services, motor vehicle legal defense services, trial defense services, IRS audit services and a 25% discount off legal services not specifically covered by the Membership for an average monthly Membership fee of approximately $21. Additionally, in approximately 44 states, the Legal Shield rider can be added to the standard plan for only $1 per month and provides members with 24-hour access to a toll-free number for attorney assistance if the member is arrested or detained. Also, during the third quarter of 2003, we began offering our Identity Theft Shield ("IDT") to new and existing members at $9.95 per month if added to a legal service Membership ("add-on IDT") or it may be purchased separately for $12.95 per month ("stand-alone IDT"). The identity theft related benefits include a credit report and related instructional guide, a credit score and related instructional guide, credit report monitoring with daily online and monthly offline notification of any changes in credit information and comprehensive identity theft restoration services.
Legal plan benefits are generally provided through a network of independent provider law firms, typically one firm per state or province and IDT plan benefits are provided by Kroll Background America, Inc., a subsidiary of Kroll Inc. ("Kroll"). Members have direct, toll-free access to Kroll or their provider law firm rather than having to call for a referral. At December 31, 2007, we had 1,575,802 Memberships in force with members in all 50 states, the District of Columbia and the Canadian provinces of Ontario, British Columbia, Alberta and Manitoba. Approximately 90% of such Memberships were in 29 states and provinces.
Legal service plans, while used in Europe for more than one hundred years and representing more than a $4 billion European industry, were first developed in the United States in the late 1960s. Since that time, there has been substantial growth in the number of Americans entitled to receive various forms of legal services through legal service plans. The National Resource Center for Consumers of Legal Services ("NRC") previously provided market information for different types of legal service plans and estimates of number of users. However, the NRC is no longer in existence and we are unaware of any current comparable information sources. In the last NRC report in 2002, the NRC estimated there were 164 million Americans without any type of legal service plan. We believe the legal service plan industry continues to evolve and market acceptance of legal service plans, as indicated by the continuing growth in the number of individuals covered by plans, is increasing.
"Public Perceptions of Lawyers: Consumer Research Findings, April 2002" prepared on behalf of the American Bar Association concluded that nearly seven in ten households had some occasion during the past year that might have led them to hire a lawyer. This report further suggested that "for the consumer, legal services are among the most difficult services to buy. The prospect of doing so is rife with uncertainty and potential risk." And further concluded that "the challenge (and opportunity) for the legal profession is to make lawyers more accessible and less threatening to consumers who might need them."
The American Bar Association's web site also reflects the legal profession's support of the legal service plan concept by saying "The ABA has long supported prepaid legal services plans as a way to increase access to the justice system for low- and middle-income Americans. These plans allow individuals and families to address legal issues before they become significant problems, reducing demands on already overburdened court systems and instilling confidence in our justice system. The ABA web site points out that:
o Group legal plans are important to maintaining confidence in our justice system and the rule of law.
o Group legal plans efficiently and inexpensively provide preventative legal services to low and middle income Americans.
o Group legal services help ease the burden on overtaxed government programs.
o Group legal plans enhance productivity by allowing employees to focus on their jobs, not their legal troubles.
Legal service plans are offered through various organizations and marketing methods and contain a wide variety of benefits. Free plans include those sponsored by labor unions, elder hotlines, the American Association of Retired Persons and the National Education Association and employee assistance plans that are also automatic enrollment plans without direct cost to participants designed to provide limited telephonic access to attorneys for members of employee groups. There are also employer paid plans pursuant to which more comprehensive benefits are offered by the employer as a fringe benefit. Finally, there are individual enrollment plans, other employment based plans, including voluntary payroll deduction plans, and miscellaneous plans. These plans typically have more comprehensive benefits, higher utilization, involve higher costs to participants, and are offered on an individual enrollment or voluntary basis. This is the market segment in which we compete.
According to the latest estimates of the census bureaus of the United States and Canada, the two geographic areas in which we operate, the number of households in the combined area exceeds 138 million. Since we have always disclosed our members in terms of Memberships and individuals covered by the Membership include the individual who purchases the Membership together with his or her spouse and never married children living at home up to age 21 or up to age 23 if the children are full time college students, we believe that our market share should be viewed as a percentage of households. Historically, our primary market focus has been the "middle" eighty percent of such households rather than the upper and lower ten percent segments based on our belief that the upper ten percent may already have a relationship with an attorney or law firm and the lower ten percent may not be able to afford the cost of a legal service plan. As a percentage of this defined "middle" market of approximately 110 million households, we currently have an approximate 1.5% share of the estimated market based on our existing 1.6 million active Memberships and, over the last 30 years, an additional 6% of households have previously purchased, but no longer own, Memberships. We routinely remarket to previous members and reinstated approximately 83,000, 76,000 and 79,000 Memberships during 2007, 2006 and 2005, respectively.
Description of Memberships
The Memberships we sell generally allow members to access legal services through a network of independent law firms ("provider law firms") under contract with us. Provider law firms are paid a monthly fixed fee on a capitated basis to render services to plan members residing within the state or province in which the provider law firm attorneys are licensed to practice. Because the fixed fee payments by us to provider law firms do not vary based on the type and amount of benefits utilized by the member, this capitated arrangement provides significant advantages to us in managing claims risk. At December 31, 2007, Memberships subject to the capitated provider law firm arrangement comprised approximately 99% of our active Memberships. The remaining Memberships, approximately 1%, were primarily sold prior to 1987 and allow members to locate their own lawyer ("open panel") to provide legal services available under the Membership with the member's lawyer being reimbursed for services rendered based on usual, reasonable and customary fees, or are in states where there is no provider law firm in place and our referral attorney network described below is utilized.
Family Legal Plan
The Family Legal Plan we currently market in most jurisdictions consists of five basic benefit groups that provide coverage for a broad range of preventive and litigation-related legal expenses. The Family Legal Plan accounted for approximately 91% of our Membership fees (including the add-on identity theft shield benefit, 76% and 79%, respectively, excluding such add-ons) in 2007 and 2006. In addition to the Family Legal Plan, we market other specialized legal services products specifically related to employment in certain professions described below.
In 12 states, certain of our plans are available in the Spanish language. For the Spanish language plans, the provider law firms have both bilingual staff and lawyers and we have bilingual staff for customer service, attorney resources and marketing service functions. We will continue to evaluate making our plans available in additional languages in markets where demand for such a product is expected to be sufficient to justify this additional cost.
In exchange for a fixed monthly, semi-annual or annual payment, members are entitled to specified legal services. Those individuals covered by the Membership include the individual who purchases the Membership along with his or her spouse and never married children living at home up to age 21 or up to age 23 if the children are full time college students. Also included are children up to age 18 for whom the member is legal guardian and any dependent child, regardless of age, who is mentally or physically disabled. Each Membership, other than the Business Owners' Legal Solutions Plan, is guaranteed renewable, except in the case of fraud or nonpayment of Membership fees. Historically, we have not raised rates to existing members. If new benefits become available, existing members may choose the newer, more comprehensive plan at a higher rate or keep their existing Memberships. Memberships are automatically renewed at the end of each Membership period unless the member cancels prior to the renewal date or fails to make payment on a timely basis.
The basic legal service plan Membership is sold as a package consisting of five separate benefit groups. Memberships range in cost from $14.95 to $25.00 per month depending in part on the schedule of benefits, which may vary from state or province in compliance with regulatory requirements. Benefits for domestic matters, bankruptcy and drug and alcohol related matters are limited in most Memberships.
Preventive Legal Services. These benefits generally offer unlimited toll-free access to a member's provider law firm for advice and consultation on any legal matter. These benefits also include letters and phone calls on the member's behalf, review of personal contracts and documents, each up to 10 pages in length, last will and testament preparation for the member and annual will reviews at no additional cost. Additional wills for spouse and other covered members may be prepared at a cost of $20.
Motor Vehicle Legal Protection. These benefits offer legal assistance for matters resulting from the operation of a licensed motor vehicle. Members have assistance available to them at no additional cost for: (a) defense in the court of original jurisdiction of moving traffic violations deemed meritorious, (b) defense in the court of original jurisdiction of any charge of manslaughter, involuntary manslaughter, vehicular homicide or negligent homicide as the result of a licensed motor vehicle accident, (c) up to 2.5 hours of assistance per incident for collection of minor property damages (up to $2,000) sustained by the member's licensed motor vehicle in an accident, (d) up to 2.5 hours of assistance per incident for collection of personal injury damages (up to $2,000) sustained by the member or covered family member while driving, riding or being struck as a pedestrian by a motor vehicle, and (e) up to 2.5 hours of assistance per incident in connection with an action, including an appeal, for the maintenance or reinstatement of a member's driver's license which has been canceled, suspended, or revoked. No coverage under this benefit of the basic legal service plan is offered to members for pre-existing conditions, drug or alcohol related matters, or for commercial vehicles over two axles or operation without a valid license.
Trial Defense. These benefits offer assistance to the member and the member's spouse through an increasing schedule of benefits based on Membership year. Up to 60 hours are available for the defense of civil or job-related criminal charges by the provider law firm in the first Membership year. The criminal action must be within the scope and responsibility of employment activities of the member or spouse. Up to 2.5 hours of assistance are available prior to trial, and the balance is available for actual trial services. The schedule of benefits under this benefit area increases by 60 hours each Membership year to: 120 hours in the second Membership year, 3 hours of which are available for pre-trial services; 180 hours in the third Membership year, 3.5 hours of which are available for pre-trial services; 240 hours in the fourth Membership year, 4 hours of which are available for pre-trial services, to the maximum limit of 300 hours in the fifth Membership year, 4.5 hours of which are available for pre-trial services. This benefit excludes domestic matters, bankruptcy, deliberate criminal acts, alcohol or drug-related matters, business matters, and pre-existing conditions.
In addition to the pre-trial benefits of the basic legal plan described above, there are additional pre-trial hours available as an option, or add-on, to the basic plan. These optional benefits cost $9.00 per month and add 15 hours of pre-trial services during the first year of the Membership increasing 5 additional hours each Membership year to the maximum limit of 35 hours in the fifth Membership year and increases total pre-trial and trial defense hours available pursuant to the expanded Membership to 75 hours during the first Membership year to 335 hours in the fifth Membership year. These pre-trial hours are in addition to those hours already provided by the basic plan so that the member, in the first year of the Membership, has a combined total of 17.5 pre-trial hours available escalating to a combined total of 39.5 pre-trial hours in the fifth Membership year. There were approximately 530,000 subscribers of this benefit at December 31, 2007 compared to 549,000 at December 31, 2006.
IRS Audit Protection Services. This benefit offers up to 50 hours of legal assistance per year in the event the member, spouse or dependent children receive written notification of an Internal Revenue Service ("IRS") audit or are summoned in writing to appear before the IRS concerning a tax return. The 50 hours of assistance are available in the following circumstances: (a) up to 1 hour for initial consultation, (b) up to 2.5 hours for representation in connection with the audit if settlement with the IRS is not reached within 30 days, and (c) the remaining 46.5 hours of actual trial time if settlement is not achieved prior to litigation. Coverage is limited to audit notification received regarding the tax return for years during which the Membership is effective. Representation for charges of fraud or income tax evasion, business and corporate tax returns and certain other matters are excluded from this benefit.
With pre-trial benefits limited to 2.5 hours to 4.5 hours based on the Membership year for trial defense (without the pre-trial option described) and 3.5 hours for the IRS audit benefit, these benefits do not ensure complete pre-trial coverage. In order to receive additional pre-trial IRS audit or trial defense benefits, a matter must actually proceed to trial. The costs of pre-trial preparation that exceed the benefits under the Membership are the responsibility of the member. Provider law firms under the closed panel Membership have agreed to provide to members any additional pre-trial services beyond those stipulated in the Membership at a 25% discount from the provider law firm's customary and usual hourly rate. Retainer fees for these additional services may be required.
Preferred Member Discount for All Other Services. Provider law firms have agreed to provide to members any legal services beyond those stipulated in the Membership at a fee discounted 25% from the provider law firm's customary and usual hourly rate. This "customary and usual hourly rate" is a fixed single hourly rate for each provider firm that is generally an average of the firm's various hourly rates for its attorneys which typically vary based on experience and expertise.
Legal Shield Benefit
In approximately 44 states and four Canadian provinces, the Legal Shield plan can be added to the standard or expanded Family Legal Plan for $1 per month and provides members with 24-hour access to a toll-free number for provider law firm assistance if the member is arrested or detained. The Legal Shield member, if detained, can present their Legal Shield card to the officer that has detained them to make it clear that they have access to legal representation and that they are requesting to contact a lawyer immediately. The benefits of the Legal Shield plan are subject to conditions imposed by the detaining authority, which may not allow for the provider law firm to communicate with the member on an immediate basis. The Legal Shield benefit was introduced in 1999. There were approximately 1,080,000 Legal Shield subscribers at December 31, 2007 compared to approximately 1,032,000 at December 31, 2006.
Identity Theft Shield Benefit
During the third quarter of 2003, we announced a joint marketing agreement with Kroll Background America Inc., a subsidiary of Kroll Inc., that allows our independent sales associates to market Kroll's identity theft benefits in 50 states and four Canadian provinces. By adding the Identity Theft Shield to their existing family Membership, members have toll free access to the identity theft specialists at Kroll. This benefit can be added to a legal service Membership for $9.95 per month or purchased separately for $12.95 per month. The identity theft related benefits include a credit report and related instructional guide, a credit score and related instructional guide, credit report monitoring with daily online and monthly offline notification of any changes in credit information and comprehensive identity theft restoration services. There were approximately 715,000 and 605,000 subscribers at December 31, 2007 and 2006, respectively, comprised of 632,000 and 540,000 subscribers at $9.95 per month and 83,000 and 65,000 subscribers at $12.95 per month.
Canadian Family Plan
The Family Legal Plan is currently marketed in the Canadian provinces of Ontario, British Columbia, Alberta and Manitoba. We began operations in Ontario and British Columbia during 1999 and Alberta and Manitoba in 2001. Benefits of the Canadian plan include expanded preventive benefits including assistance with Canadian Government agencies, warranty assistance and small claims court assistance as well as the preferred member discount. Canadian Membership fees collected during 2007 were approximately $7.6 million (including positive foreign currency translation adjustments) in U.S. dollars compared to $6.8 million collected in 2006 and $5.6 million collected in 2005.
Specialty Legal Service Plans
In addition to the Family Legal Plan described above, we also offer other specialty or niche legal service plans. These specialty plans usually contain many of the Family Legal Plan benefits adjusted as necessary to meet specific industry or prospective member requirements. In addition to those specialty plans described below, we will continue to evaluate and develop other such plans as the need and market allow.
Business Owners' Legal Solutions Plan The Business Owners' Legal Solutions plan was developed during 1995 and provides business oriented legal service benefits for small businesses with 99 or fewer employees. This plan was developed and test marketed in selected geographical areas and more widely marketed beginning in 1996 at a monthly rate of $69.00. This plan provides small businesses with legal consultation and correspondence benefits, contract and document reviews, debt collection assistance and reduced rates for any non-covered areas. During 1997, the coverage offered pursuant to this plan was expanded to include trial defense benefits and Membership in GoSmallBiz.com, an unrelated Internet based service provider. Through GoSmallBiz.com, members may receive unlimited business consultations from business consultants and have access to timely small business articles, educational software, Internet tools and more. This expanded plan is currently marketed at a monthly rate ranging from $69 to $150 ($175 in Canada) depending on the number of employees and provides business oriented legal service benefits for any for-profit business with 99 or fewer employees. This plan is available in 46 states and three Canadian provinces and represented approximately 5.3%, 5.1% and 3.4% of our Membership fees during 2007, 2006 and 2005, respectively.
Commercial Driver Legal Plan
The Commercial Driver Legal Plan, developed in 1986, is designed specifically for the professional truck driver and offers a variety of driving-related benefits, including coverage for moving and non-moving violations. This plan provides coverage by a provider law firm for persons who drive a commercial vehicle. This legal service plan is currently offered in 45 states. In certain states, the Commercial Driver Legal Plan is underwritten by the Road America Motor Club, an unrelated motor service club. During each of the years ended December 31, 2007, 2006 and 2005, this plan accounted for approximately .9% of Membership fees. The Plan underwritten by the Road America Motor Club is available at the monthly rate of $35.95 or at a group rate of $32.95. Plans underwritten by us are available at the monthly rate of $32.95 or at a group rate of $29.95. Benefits include the motor vehicle related benefits described above, defense of Department of Transportation violations and the 25% discounted rate for services beyond plan scope, such as defense of non-moving violations. The Road America Motor Club underwritten plan includes bail and arrest bonds and services for family vehicles.
Home-Based Business Rider
The Home-Based Business plan was designed to provide small business owners access to commonly needed legal services. It can be added to the Expanded Family Legal Plan in approved states. To qualify, the business and residence address must be the same with three or fewer employees and be a for-profit business that is not publicly traded. Benefits under this plan include unlimited business telephone consultation, review of three business contracts per month, three business and debt collection letters per month and discounted trial defense rates. This plan also includes Membership in GoSmallBiz.com. This plan is available in 37 states and two Canadian provinces and represented approximately 1.8% of our Membership fees during each of 2007, 2006 and 2005.
Comprehensive Group Legal Services Plan In late 1999 we introduced the Comprehensive Group plan, designed for the large group employee benefit market. This plan, available in 36 states, provides all the benefits of the Family Legal Plan as well as mortgage document preparation, assistance with uncontested legal situations such as adoptions, name changes, separations and divorces. Additional benefits include the preparation of health care power of attorney and living wills or directives to physicians. Although sales of this plan during the last three years (2,735 Memberships, 5,892 Memberships and 4,444 Memberships during 2007, 2006 and 2005, respectively) are not significant compared to our total Membership sales, we still believe this plan improves our competitive position in the large group market. We continue to emphasize group marketing to employee groups of less than 50 rather than larger groups where there is more competition, price negotiation and typically a longer sales cycle.
Other than additional benefits such as the Legal Shield and Identity Theft Shield benefits described above, the basic structure and design of the Membership benefits has not significantly changed over the last several years. The consistency in plan design and delivery provides us consistent, accurate data about plan utilization which enables us to manage our benefit costs through the capitated payment structure to provider firms. We frequently evaluate and consider other plan benefits that may include other services complimentary to the basic legal service plan.
Provider Law Firms
Our Memberships generally allow members to access legal services through a network of independent provider law firms under contract with us generally referred to as "provider law firms." Provider law firms are paid a fixed fee on a per capita basis to render services to plan members residing within the state or province as provided by the contract. Because the fixed fee payments by us to provider law firms in connection with the Memberships do not vary based on the type and amount of benefits utilized by the member, this arrangement provides significant advantages to us in managing our cost of benefits. Pursuant to these provider law firm arrangements and due to the volume of revenue directed to these firms, we have the ability to more effectively monitor the customer service aspects of the legal services provided, the financial leverage to help ensure a customer friendly emphasis by the provider law firms and access to larger, more diversified law firms. Through our members, we are typically the largest client base of our provider law firms.
Provider law firms are selected to serve members based on a number of factors, including recommendations from provider law firms and other lawyers in the area in which the candidate provider law firm is located and in neighboring states, our investigation of bar association standing and client references, evaluation of the education, experience and areas of practice of lawyers within the firm, on-site evaluations by our management, and interviews with lawyers in the firm who would be responsible for providing services. Most importantly, these candidate law firms are evaluated on the firm's customer service philosophy.
Approximately 87% of provider law firms, representing 98% of our legal service members, are connected to us via high-speed digital links to our management information systems, thereby providing real-time monitoring capability. This online connection offers the provider law firm access to specially designed software developed by us for administration of legal services by the firm. These systems provide statistical reports of each law firm's activity and performance and allow virtually all of the members served by provider law firms to be monitored on a near real-time basis. The few provider law firms that are not online with us typically have a small Membership base and must provide various weekly reports to us to assist in monitoring the firm's service level. The combination of the online statistical reporting and weekly service reports for smaller provider law firms allows quality control monitoring of over 15 separate service delivery benchmarks. In addition, we regularly conduct extensive random surveys of members who have used the legal services of a provider law firm. We survey members in each state every 60 days, compile the results of such surveys and provide the provider law firms with copies of each survey and the overall summary of the results. If a member indicates on a survey the service did not meet their expectation, the member is contacted as soon as possible to resolve the issue.
Each month, provider law firms are presented with a comprehensive report of ratings related to our online monitoring, member complaints, member survey evaluations, telephone reports and other information developed in connection with member service monitoring. If a problem is detected, we recommend immediate remedial actions to the provider law firms to eliminate service deficiencies. In the event the deficiencies of a provider law firm are not eliminated through discussions and additional training with us, such deficiencies may result in the termination of the provider law firm. We are in constant communication with our provider law firms and meet with them frequently for additional training, to encourage increased communications with us and to share suggestions relating to the timely and effective delivery of services to our members.
Each attorney member of the provider law firm rendering services must have at least two years of experience as a lawyer, unless we waive this requirement due to special circumstances such as instances when the lawyer demonstrates significant legal experience acquired in an academic, judicial or similar capacity other than as a lawyer. We provide customer service training to the provider law firms and their support staff through on-site training that allows us to observe the individual lawyers of provider law firms as they directly assist the members.
Agreements with provider law firms: (a) generally permit termination of the agreement by either party upon 60 days prior written notice, (b) permit us to terminate the Agreement for cause immediately upon written notice, (c) require the firm to maintain a minimum amount of malpractice insurance on each of its attorneys, in an amount not less than $100,000, (d) preclude us from interference with the lawyer-client relationship, (e) provide for periodic review of services provided, (f) provide for protection of our proprietary information and (g) require the firm to indemnify us against liabilities resulting from legal services rendered by the firm. We are precluded from contracting with other law firms to provide the same service in the same geographic area, except in situations where the designated law firm has a conflict of interest, we enroll a group of 500 or more members, or when the agreement is terminated by either party. Provider law firms are precluded from contracting with other prepaid legal service companies without our approval. Provider law firms receive a fixed monthly payment for each member who are residents in the service area and are responsible for providing the Membership benefits without additional remuneration. If a provider law firm delivers legal services to an open panel member, the law firm is reimbursed for services rendered according to the open panel Membership. As of December 31, 2007, provider law firms averaged approximately 56 employees each and on average are relatively evenly split between support staff and lawyers.
We have had occasional disputes with provider law firms, some of which have resulted in litigation. The toll-free telephone lines utilized and paid for by the provider law firms are owned by us so that in the event of a termination, the members' calls can be rerouted very quickly. Nonetheless, we believe that our relations with provider law firms are generally very good. At the end of 2007, we had provider law firms representing 47 states and four provinces compared to 48 states and four provinces at the end of 2006. During the last three calendar years, our relationships with a total of seven provider law firms were terminated by us or the provider law firm. As of December 31, 2007, 33 provider law firms have been under contract with us for more than eight years with the average tenure of all provider law firms being approximately 9.4 years.
There are occasions when members need to be referred by the provider law firm or PPL to an attorney outside the provider law firm. These instances are for geographic reasons, expertise reasons or if the matter is a conflict of interest for the provider law firm. We have an extensive database of referral lawyers developed for PPL and the provider law firms to access when members need services to be coordinated outside the provider law firm. Lawyers with whom members have experienced verified service problems, or are otherwise inappropriate for the referral system, are removed from our database of referral lawyers.
Martin H. Belsky
Mr. Belsky is currently Dean of the University of Akron School of Law, a position he has held since January 2008. Previously, Mr. Belsky was Dean of the University of Tulsa College of Law from 1995 to 2004. Subsequent to being Dean, Mr. Belsky was a professor of Law at the University of Tulsa College of Law, teaching courses in constitutional law, ethics, international law, and oceans policy until becoming accepting his current position at the University of Akron.
Harland C. Stonecipher
Mr. Stonecipher has been the Chairman of our Board of Directors since its organization in 1976 and served as Chief Executive Officer until March 1996 and since February 1997. Mr. Stonecipher also served as our President at various times through January 1995 and since December 2002. Mr. Stonecipher also serves as an executive officer of several of our subsidiaries and served as a director of AMS Health Sciences, Inc. until December 5, 2005.
John W. Hail
John W. Hail is the founder of AMS Health Sciences, Inc. (formerly Advantage Marketing Systems, Inc.) ("AMS") and has served as Chief Executive Officer and Chairman of the Board of Directors of AMS since its inception in June 1988 until February 12, 2006. AMS sells more than 60 natural nutritional supplements, weight management products, and natural skincare products. AMS filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code on December 27, 2007. From July 1986 through May 1988, Mr. Hail served as our Executive Vice President, Director and Agency Director and also served as Chairman of the Board of Directors of TVC Marketing, Inc., which was our exclusive marketing agent from April 1984 through September 1985. Mr. Hail also serves as a director of InPlay Technologies, Inc. (NASDAQ: NPLA) (formerly Duraswitch Industries, Inc.).
Thomas W. Smith
Mr. Smith is the largest outside shareholder of the Company and is the managing partner of Prescott Investors, Inc, a private investment firm he founded in 1973. He currently serves as a director of SEI Investments Company (NASDAQ-GS: SEIC) and Copart, Inc. (NASDAQ-GS: CPRT).
Orland G. Aldridge
Mr. Aldridge retired as a professor from Northeastern Oklahoma A & M College in Miami, Oklahoma in 2002 where he had been an instructor since 1999 and has been and remains an independent insurance agent. He has served as a director of our wholly-owned subsidiary, Pre-Paid Legal Casualty, Inc. since 1991.
Peter K. Grunebaum
Mr. Grunebaum, currently an independent investment banker and corporate consultant, was the Managing Director of Fortrend International, an investment firm headquartered in New York, New York, a position he held from 1989 until the end of 2003. Mr. Grunebaum also serves as a director of StoneMor GP, LLC the general partner of StoneMor Partners LP (NASDAQ-GM: STON) and Lucas Energy, Inc. (AMEX: LEI).
Duke R. Ligon
Mr. Ligon retired in January 2007 as senior vice president and general counsel for Devon Energy Corporation (NYSE:DVN) and brings more than 35 years of legal expertise in corporate securities, litigation, governmental affairs and mergers and acquisitions. Mr. Ligon is currently serving as executive director of the Love's Entrepreneurial Center at Oklahoma City University as well as strategic advisor to the Oklahoma based Love's Travel Stores. Prior to joining Devon in 1997, he practiced law for 12 years and last served as a partner at the law firm of Mayer, Brown & Platt in New York City. In addition, he was senior vice president and managing director for investment banking at Bankers Trust Co. in New York City for 10 years. Ligon received an undergraduate degree in chemistry from Westminster College and a law degree from the University of Texas School of Law. Mr. Ligon also serves as a director of Panhandle Oil & Gas
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview of the Our Financial Model
We are in one line of business - the marketing of legal expense and other complimentary plans primarily through a multi-level marketing force to individuals. Our principal revenues are derived from Membership fees, and to a much lesser extent, revenues from marketing associates. Our principal expenses are commissions, Membership benefits, associate services and direct marketing costs and general and administrative expense.
The number of active Memberships in force and the average monthly fee will directly determine Membership fees and their impact on total revenues during any period. The two most important variables impacting the number of active Memberships during a period are the number of new Memberships written during the period combined with the retention characteristics of both new and existing Memberships. See "Measures of Member Retention" below for a discussion of our Membership retention. Associate services revenues are a function of the number of new sales associates enrolled and the price of entry during the period, the number of associates subscribing to our eService offering and the amount of sales tools purchased by the sales force.
Membership benefits expense is primarily determined by the number of active Memberships and the per capita contractual rate that exists between us and our benefits providers and during the last five years has been and is expected to continue to be a relatively consistent percentage of Membership revenues of approximately 33%-35%. Commissions paid to associates are primarily dependent on the number and price of new Memberships sold during a period and any special incentives that may be in place during the period. We expense advance commissions ratably over the first month of the related Membership. The level of commission expense in relation to Membership revenues varies depending on the level of new Memberships written and is expected to be higher when we experience increases in new Membership sales. During the last five years this percentage has ranged from approximately 30% to 36% of Membership revenues. Associate services and direct marketing expenses are directly impacted by the number of new associates enrolled during a period due to the cost of materials provided to such new associates, the number of associates subscribing to our eService offering, the amount of sales tools purchased by the sales force as well as the number of those associates who successfully meet the CFT training and incentive award program qualifications. General and administrative expenses are expected to trend up in terms of dollars, but remain relatively constant as a percent of Membership fees. During the past five years, general and administrative expenses have ranged from 11% to 13% of Membership fees.
The primary benchmarks monitored by us throughout the various periods include the number of active Memberships and their related retention characteristics, the number of new Memberships written, the number of new associates enrolled and the percentage of new associates that successfully meet the CFT qualification requirements.
Although we have grown our Membership fees in each of the past 15 years, the rate of growth has not been one we find acceptable. We believe however, that our current product design, pricing parameters and business model are generally appropriate and we have no immediate plans to change these fundamental sectors. Our focus during 2008 will continue to be on improved training of our associates, enhancing the quality of sales tools provided to new and existing associates, providing incentives for associates to write consistent, quality business and continued emphasis on improving the basic retention characteristics of our Memberships.
Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of accounting policies. If these estimates or assumptions are incorrect, there could be a material change in our financial condition or operating results. Many of these "critical accounting policies" are common in the insurance and financial services industries; others are specific to our business and operations. Our critical accounting policies include estimates relating to revenue recognition related to Membership and associate fees, deferral of Membership and associate related costs, expense recognition related to commissions to associates, accrual of incentive awards payable and accounting for legal contingencies.
Revenue recognition - Membership and Associate Fees Our principal revenues are derived from Membership fees, most of which are collected on a monthly basis. Memberships are generally guaranteed renewable and non-cancelable except for fraud, non-payment of Membership fees or upon written request. Membership fees are recognized in income ratably over the related service period in accordance with Membership terms, which generally require the holder of the Membership to remit fees on an annual, semi-annual or monthly basis. Approximately 95% of members remit their Membership fees on a monthly basis. Approximately 74% of our Membership fees are paid in advance and, therefore, are deferred and recognized over their respective periods. At December 31, 2007 the deferred revenue associated with the Membership fees was $21.9 million which is classified as a current liability.
We also charge new members, who are not part of an employee group, a $10 enrollment fee. This enrollment fee and related incremental direct and origination costs are deferred and recognized in income over the estimated life of a Membership in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") as revised by SEC Staff Accounting Bulletin No. 104. At December 31, 2007 the deferred revenue associated with the Membership enrollment fees was $5.7 million, of which $2.4 million was classified as a current liability. We compute the expected Membership life using more than 20 years of actuarial data as explained in more detail in "Measures of Membership Retention" below. At December 31, 2007, management computed the expected Membership life to be approximately three years, which is unchanged from year end 2006. If the expected Membership life were to change significantly, which management does not expect in the short term, the deferred Membership enrollment fee and related costs would be recognized over a longer or shorter period.
We derive revenues from services provided to our marketing sales force including a one-time non-refundable enrollment fee from each new sales associate for which we provide initial sales and marketing supplies and enrollment services to the associate. Average enrollment fees paid by new sales associates were $57, $50 and $57 for 2007, 2006 and 2005, respectively. Revenue from, and costs of, the initial sales and marketing supplies (approximately $13) are recognized when the materials are delivered to the associates. The remaining revenues and related incremental direct and origination costs are deferred and recognized over the estimated average active service period of associates which at December 31, 2007 is estimated to be approximately five months, which is unchanged from year end 2006. At December 31, 2007, the deferred revenue associated with sales associate enrollment fees was $855,000, which is classified as a current liability. Management estimates the active service period of an associate periodically based on the average number of months an associate produces new Memberships including those associates that fail to write any Memberships. If the active service period of associates changes significantly, which management does not expect in the short term, the deferred revenue and related costs would be recognized over the new estimated active service period.
Member and Associate Costs
Deferred costs represent the incremental direct and origination costs we incur in enrolling new Members and new associates related to the deferred revenue discussed above, and that portion of payments made to provider law firms ($7.0 million deferred at December 31, 2007 which is classified as a current asset) and associates related to deferred Membership revenue. Deferred costs for enrolling new members include the cost of the Membership kit and salary and benefit costs for employees who process Membership enrollments, and were $5.7 million at December 31, 2007, of which $2.4 million is classified in current assets. Deferred costs for enrolling new associates include training and success bonuses paid to individuals involved in recruiting the associate and salary and benefit costs of employees who process associate enrollments, and were $648,000 at December 31, 2007, and are classified as a current asset. Such costs are deferred to the extent of the lesser of actual costs incurred or the amount of the related fee charged for such services. Deferred costs are amortized to expense over the same period as the related deferred revenue as discussed above. Deferred costs that will be recognized within one year of the balance sheet date are classified as current and all remaining deferred costs are considered noncurrent. Associate related costs are reflected as associate services and direct marketing, and are expensed as incurred if not related to the deferred revenue discussed above. These costs include providing materials and services to associates, associate introduction kits, associate incentive programs, group marketing and marketing services departments (including costs of related travel, marketing events, leadership summits and international sales convention).
Commissions to Associates
Beginning with new Memberships written after March 1, 1995, we implemented a level commission schedule (approximately 27% per annum at December 31, 2001) with up to a three-year advance commission payment. Prior to March 1, 1995, our commission program provided for advance commission payments to associates of approximately 70% of first year Membership fees on new Membership sales and commissions were earned by the associate at a rate of approximately 16% in all subsequent years. Effective March 1, 2002, and in order to offer additional incentives for increased Membership retention rates, we returned to a differential commission structure with rates of approximately 80% of first year Membership fees on new Memberships written and variable renewal commission rates ranging from five to 25% per annum based on the first 12 month Membership retention rate of the associate's personal sales and those of his organization. Beginning in August 2003, we allowed the associate to choose between the level commission structure and up to a three year commission advance or the differential commission structure with a one year commission advance.
Prior to January 1997 we advanced commissions at the time of sale of all new Memberships. In January 1997, we implemented a policy whereby the associate receives only earned commissions on the first three sales unless the associate has successfully completed the CFT training program. For all sales beginning with the fourth Membership or all sales made by an associate successfully completing the CFT training program, advance commission payments were made at the time of sale of a new Membership. Beginning April 1, 2007, we began advancing commissions at the time of sale of all new Memberships. The amount of cash potentially advanced upon the sale of a new Membership, prior to the recoupment of any charge-backs (described below), represents an amount equal to up to one-year commission earnings. Although the average number of marketing associates receiving an advance commission payment on a new Membership is nine, the overall initial advance may be paid to approximately 30 different individuals, each at a different level within the overall commission structure. The commission advance immediately increases an associate's unearned advance commission balance to us.
Although prior to March 1, 2002, we advanced our sales associates up to three years commission when a Membership was sold and subsequent to March 1, 2002, up to one year commission, the average commission advance paid to our sales associates as a group is actually less than the maximum amount possible because some associates choose to receive less than a full advance and we pay less than a full advance on some of our specialty products. In addition, we may from time to time place associates on a less than full advance basis if there are problems with the quality of the business being submitted or other performance problems with an associate. Additionally, we do not advance commissions on certain categories of group business which have historically demonstrated below average retention characteristics. Also, any residual commissions due an associate (defined as commission on an individual Membership after the advance has been earned) are retained to reduce any remaining unearned commission advance balances prior to being paid to that sales associate. For those associates that have made at least 10 personal sales, opened at least one group and personally write 15% or more of their organizational business, 15% of their commissions are set aside in individual reserve balance accounts, further reducing the amount of advance commissions. The average commission advance paid as a percentage of the maximum advance possible pursuant to our commission structures was approximately 82%, 78% and 75% during 2007, 2006 and 2005, respectively. The commission cost per new Membership sold has increased over the prior year by 3%, 2% and 6% for 2007, 2006 and 2005, respectively, and varies depending on the compensation structure that is in place at the time a new Membership is sold, the monthly Membership fee of the Membership sold and the amount of any charge-backs (recoupment of previous commission advances) that are deducted from amounts that would otherwise be paid to the various sales associates that are compensated for the Membership sale. Should we add additional products, such as the Identity Theft Shield described above or add additional commissions to our compensation plan or reduce the amount of chargebacks collected from our associates, the commission cost per new Membership will increase accordingly.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
The following discussion should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2007, which describes, among other things, our basic business model, critical accounting policies, measures of Membership retention, and basic cash flow characteristics of our business. The following tables set forth changes in the principal categories of revenues and expenses and Membership and recruiting activity for the first quarter of 2008 compared to the first quarter of 2007 and the fourth quarter of 2007.
Results of Operations - First Quarter of 2008 compared to First Quarter of 2007
Net income increased 8% for the first quarter of 2008 to $15.9 million from $14.7 million for the prior year's first quarter primarily due to an increase in Membership fees of $5.2 million and a decrease in associate services and direct marketing expenses of $700,000 partially offset by a decrease in associate services income of $1 million, an increase in other expenses of $400,000 and an increase in the provision for income taxes of $2.6 million. Diluted earnings per share increased 19% to $1.29 per share from $1.08 per share for the prior year's comparable quarter, higher than the net income increase, due to an approximate 9% decrease in the weighted average number of diluted shares outstanding.
Membership fees totaled $109.1 million during the 2008 first quarter compared to $103.9 million for 2007, an increase of 5%. Membership fees and their impact on total revenues in any period are determined directly by the number of active Memberships in force during any such period and the monthly amount of such Memberships. The active Memberships in force are determined by both the number of new Memberships sold in any period together with the renewal rate of existing Memberships. New Membership sales decreased 13% during the three months ended March 31, 2008 to 140,199 from 161,530 during the comparable period of 2007. At March 31, 2008, there were 1,566,959 active Memberships in force compared to 1,551,129 at March 31, 2007, an increase of 1%. Additionally, the average annual fee per Membership has increased from $294 for all Memberships in force at March 31, 2007 to $299 for all Memberships in force at March 31, 2008, primarily as a result of a larger number of Identity Theft Shield memberships.
Associate services revenue remained unchanged at $6.0 million for both the 2008 and 2007 first quarters. The eService fees totaled $3.1 million during the 2008 period compared to $3.0 million for 2007, an increase of 3%. We recognized revenue from associate fees of approximately $2.0 million during the 2008 period compared to $3.2 million during 2007, a decrease of 38%. New associates typically pay a fee ranging from $49 to $249, depending on special promotions we implement from time to time. New enrollments of sales associates decreased 17% during the first quarter of 2008 to 25,800 from 31,043 for 2007, and the average associate fee paid during 2008 was $95 compared to $103 for 2007, a decrease of 8%. Future revenues from associate services will depend primarily on the number of new associates enrolled, the price charged for new associates and the number who choose to participate in our eService program, but we expect that such revenues will continue to be largely offset by the direct and indirect cost to us of training, providing associate services and other direct marketing expenses.
Other revenue remained unchanged at $1.1 million for both the 2008 and 2007 periods.
Total revenues increased 4% to $116.2 million for the three months ended March 31, 2008 from $112.1 million during the comparable period of 2007 due to the $5.2 million increase in Membership fees partially offset by the $1 million decline in associate services revenue.
Membership benefits, which primarily represent payments to provider law firms and Kroll, totaled $37.3 million for the three months ended March 31, 2008 compared to $36.8 million for the 2007 period and represented 34% and 35% of Membership fees, respectively. This Membership benefit ratio (Membership benefits as a percentage of Membership fees) should be slightly reduced going forward as substantially all active Memberships provide for a capitated cost and we have reduced the capitated cost of the Identity Theft plan benefits effective April 1, 2007 with additional reductions effective beginning January 1, 2008, 2009 and 2010.
Commissions to associates increased 1% from $30.5 million for the first quarter of 2007 to $30.8 million for 2008, and represented 28% and 29% of Membership fees, respectively. Commissions to associates are primarily dependent on the number of new Memberships sold during a period and the average fee of those Memberships. New Memberships sold during the first quarter of 2008 totaled 140,199, a 13% decrease from the 161,530 sold during 2007, and the "add-on" IDT Membership sales which are not included in these totals decreased 13% to 81,263 for the first quarter of 2008 from 93,204 for 2007. Although our new Membership fees written during the first quarter of 2008 decreased 10%, the 1% increase in commissions to associates resulted due to a change effective April 1, 2007 when we began advancing commissions on the first Membership sale.
Associate services and direct marketing expenses decreased $800,000 to $5.6 million for the 2008 first quarter from $6.4 million for 2007. The decrease was primarily a result of decreased costs for incentive trips. We offer the Player's Club incentive program to provide additional incentives to our associates as a reward for consistent, quality business. Associates can earn the right to receive additional monthly bonuses by meeting monthly qualification requirements for the entire calendar year and maintaining certain personal retention rates for the Memberships sold during the calendar year. These expenses include the costs of providing associate services and marketing expenses.
General and administrative expenses during the three months ended March 31, 2008 and 2007 were $12.6 million and $12.7 million, respectively, and represented 12% of Membership fees for both periods. The slight decrease in general and administrative expenses is due primarily to the reclassification of state tax expense to the provision for income taxes. State tax expense included in general and administrative expenses for the three months ended March 31, 2007 was $881,000 compared to $1.5 million included in the provision for income taxes for the 2008 period. Decreases in employee expense of $189,000; in telephone and utility expense of $95,000, in other taxes of $112,000; in consulting expenses of $125,000 and in bank service charges of $82,000 were primarily offset by an increase in legal fees of $951,000.
Other expenses, net, which include depreciation and amortization, litigation accruals, interest expense and premium taxes reduced by interest income, were $4.2 million for the three months ended March 31, 2008 compared to $3.7 million for the 2007 comparable period. Depreciation expense was $2.2 million and $2.1 million, respectively, for the two periods. Interest expense decreased to $1.3 million during the 2008 period from $1.9 million during the comparable period of 2007 as a result of reduced debt levels and lower interest rates. Litigation accruals increased by $910,000 for the first quarter of 2008 from the 2007 period due to increased litigation activity described in Note 2 above. Premium taxes decreased from $506,000 for the three months ended March 31, 2007 to $422,000 for the comparable period of 2007. Interest income decreased $21,000 to $711,000 for the three months ended March 31, 2008 from $732,000 for the comparable period of 2007, due to a decrease in average cash and investment balances and a decrease in interest rates.
We have recorded a provision for income taxes of $9.8 million (38.1% of pretax income) and $7.2 million (32.9% of pretax income) for the three months ended March 31, 2008 and 2007, respectively. The increase in the tax rate for 2008 compared to 2007 is due to the inclusion of all income based taxes in the provision for income taxes and we expect the 2008 rate to be representative on a go forward basis.
Thank you, operator, and good morning. This is Randy Harp, Chief Operating Officer of the company. I want to welcome you to the 2008 First Quarter Earnings Conference Call for Pre-Paid Legal Services. Joining me here at home office in Oklahoma is Steve Williamson, our Chief Financial Officer.
Before we begin I want to remind everybody that the conference call will contain forward-looking statements, including our expectations of future results and our future plans. Actual results might differ materially from those projected in any of these forward-looking statements. Additional information concerning risk factors that could cause the results to differ materially from those forward-looking statements are contained in our press release announcing our earnings, as well as some other disclosures in our public reports on Forms 10-K, 10-Q, and 8-K that are filed with the SEC and available on the SEC Edgar web site, as well as our own web site.
So weâ€™ll move quickly this morning through our comments and Steve is going through an analytical flux analysis of the numbers, because we have quite a few questions we have received and want to address as quickly as possible.
I do want to mention to those of you that might not have received our most recent annual report, I just wanted to remind you that we have included in the back of the annual report a compilation DVD that contains the first four episodes of our national media campaign, Justice For All: Accessing The Promise, that we began in September. It has been broadcast on Court TV, which is now True TV.
The latest episode aired Saturday, April 19, and the next installment will be on True TV on Saturday, May 17, so we want to certainly encourage you to tune in and if you havenâ€™t seen those, would encourage you to put the DVD in.
Again, something that weâ€™re proud of and I think never intended to be, necessarily, a sales tool, but we think it provides tremendous third-party credibility and that was our goal and weâ€™re proud of what weâ€™ve been able to put together there.
At this time I will ask our Chief Financial Officer, Steve Williamson, to step through the more significant financial highlights and analysis for the 2008 first quarter.
First quarter of 2008 membership fees increased 5% over the first quarter of 2007 to a total of $109.1 million. Associate Services revenue was down $1 million to $6 million primarily due to fewer new associates that were recruited. Other revenue was pretty much unchanged at $1.1 million for both quarters. Of course, thatâ€™s primarily the $10 enrollment fee that we amortize into income. That brings total revenue up 4% to $116.2 million for the first quarter of 2008.
Membership benefits came in at 34.2% of membership fees for 2008, down from the 35.4% for the prior year. Of course, thatâ€™s due to what weâ€™ve talked about before, a $0.25 per member per month decrease in our IT membership cost to provide those benefits. The estimated benefit ratio will continue to be near this level for the balance of the 2008 quarters and then, of course, in the beginning of 2009 and the beginning of 2010 we will have another $0.25 savings per member per month, which should push the total benefit ratio down by about 50 basis points each time.
Commissions were up slightly, about $292,000 to $30.8 million for 2008. We had fewer membership sales: 140,000 versus 161.5, which were partially offset by higher average premiums sold, 321 versus 310. The membership times average premium gets you to the premiums written that weâ€™ve talked about quite a bit as a leading indicator of what commissions are going to be. That premiums written number was down about 10%.
And again, as we discussed in the last quarter earnings call, beginning in the second quarter of 2007 we began advancing commissions from the first membership sale for all new associates, and that increased that average commissions paid per member. That change, coupled with a $1.2 million decrease in deferred membership commissions resulted in the net increase of about $292,000.
And you will remember on the deferred commissions, we defer or amortize that expense over the course of the first month that that membership is sold. So, effectively half of the last month of each quarter is deferred for commissions and that fluctuation will make slight changes, and sometimes large changes, depending on the level of commission paid in the last month of any given quarter.
Associates services and direct marketing costs, $5.6 million for 2008. Thatâ€™s down $771,000 from 2007 levels, primarily due to increased costs of our incentive programs.
The G&A cost came in at 11.5%, the membership fees for 2008 versus 12.3% for 2007. The 12.3% for 2007 equals 11.5% when you exclude the income taxes that were reclassified below the line for this period and also for the fourth quarter of 2007. And so pretty much unchanged overall, although we did have several improvements in several areas like employee costs, bank service charges, and teleco costs. Those saving were offset by an increase in legal fees.
You also recall that in the fourth quarter of 2007 G&A rose to 9.8%, or was at 9.8%. It was lowered by the $2.1 million reclass, which lowered G&A, where we took the state incomes taxes that were classified previously in G&A and put them to below the line with federal income taxes so that all the income-based taxes are below the line. And that reclassification brought the G&A level for the fourth quarter of 2007 to 11.7% when presented on the same basis as the first quarter of 2008. So G&A remains in the pretty tight range there of about 11.5%.
Other net includes $2.2 million of depreciation in 2008 versus $2.1 million last year. Interest expense of $1.3 million for this quarter. $320,000 of that was interest associated with the state income tax liability that we paid. Interest expense overall, including the state tax interest, was down $1.9 million, of course, due to lower debt and much significantly lower interest rates.
Premium taxes were slightly lower at $422,000. Plus also, we had an increase in the litigation reserve, $925,000, bringing it to $1 million balance on the balance sheet for that litigation reserve.
All these expenses were offset by interest income of approximately $700,000 for the first quarter of 2008, which is the same level that we had in last yearâ€™s first quarter.
Provision for taxes came in at 38.1% for 2008 versus 32.9%. Of course, the 2008 includes the state income taxes that I talked about in the G&A section and we would expect that the overall roll in the federal and state income tax to remain at about that 38% level through the balance of the year.
Net income results came in at $15.9 million for 2008, an 8% increase over 2007. And also an all time record high for net income.
Diluted earnings per share decreased 9% due to our treasury stock purchases. We picked up another 280,000 shares at an average price of $46.08 per share, total cost of $12.9 million during the first quarter of 2008. Only 52,500 options remain at March 31. We ended the year with 12.2 million shares outstanding. First quarter diluted earnings per share was up $0.29, thatâ€™s a 19% increase over the $1.08 we had for 2007.
Cash flow from operations was $20.8 million for 2008 versus $24.1 million for 2007. Of course, that was down due to we had about $8 million of state income tax payments due to the matters we discussed before, so if you take that out it would have been a slight increase, as you would expect.
Total CapEx was about $2 million for 2008. We still feel that our total CapEx for the year should be in that $4 million-$6 million range for 2008.
Notes payable, $69.2 million, principal payments $4.6 million per quarter, always tied to LIBOR average costs [inaudible] LIBOR was 1.42. that puts us at right around 4.5% or less and it matures in the year 2011. We are in compliance with all of our debt covenants. Under the most restrictive covenants we would have about $14 million to spend on our stock buy-back program.
At March 31, 2008, we had consolidated cash and [inaudible] investments of about $60 million. We also did request and receive a $9 million dividend from our insurance club that we do each year. $1.6 million of that was paid up to the parent company in March. The $7.4 million balance was paid in April. And we do plan to continue our long-standing stock buy-back program when the market opens today.
And Iâ€™ll turn it back over to Randy.
We do want to respond to the e-mail questions that we have received and have quite a few and will certainly take our best shot. Some of these we just received a few minutes ago so certainly will be just off-the-cuff remarks that weâ€™ve not had time to research. But we will go through those.